Q. 6 Two separators (2-phase and 3-phase) are being considered for purchase for
ID: 1159727 • Letter: Q
Question
Q. 6
Two separators (2-phase and 3-phase) are being considered for purchase for upgrading the oil production facilities. The following table shows the cost associated of two separators.
Separator A Separator B
( 2-phase) ( 3-phase)
Initial cost and
insulation 15,000 $ 25,000 $
Annual uniform end
of year maintenance 2,000 $ 3,000 $
Overhaul end of year 3 2,500 $
Salvage value 1,500
Service life time 6 years 4 Years
For an annual interest rate of 7 % determined which separator is better for purchasing? Explain your selection
Not. Show all calculation and draw Cash Flow Diagram
Explanation / Answer
ANSWER:
diagram couldn't be uploaded due to technical issues and hence i am making the cash flow of both the alternatives.
project a:
-500
project b:
We need to find the net present worth of the 2 alternatives.
i = 7% and n = 6 years for project a.
1) pw of project a = first cost + operating cost(p/a,i,n) + salvage value(p/f,i,n)
pw of project a = -15,000 - 2,000(p/a,7%,6) + 1,500(p/f,7%,6)
pw of project a = -15,000 - 2,000 * 4.767 + 1,500 * 0.6663
pw of project a = -15,000 - 9,534 + 999.45
pw of project a = -25,534.6
2) i = 7% and n = 4 years for project b.
pw of project b = first cost + operating cost(p/a,i,n) + salvage value(p/f,i,n)
pw of project b = -25,000 - 3,000(p/a,7%,4) - 2,500(p/f,7%,3)
pw of project b = -25,000 - 3,000 * 3.387 - 2,500 * 0.8163
pw of project b = -25,000 - 10,161 - 2,040.75
pw of project b = -37,201.75
since project a has a higher present worth , therefore we will select project a.
year 0 1 2 3 4 5 6 initial cost -15,000 maintenance cost -2,000 -2,000 -2,000 -2,000 -2,000 -2,000 salvage value 1,500 cash flows -15,000 -2,000 -2,000 -2,000 -2,000 -2,000-500
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